Obama Tries to Close Deal on Financial Reform

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Part rebuke, part olive branch and part sales pitch, President Barack Obama's speech Thursday exhorting bankers to "join us, instead of fighting us" on financial reform appeared to have won over some on Wall Street.

The speech was the closing argument in Obama’s two-year effort to enact regulations that would better control financial risk-taking, protect consumers and develop an orderly system of shutting down banks that become “too big to fail.” Debate on a final version of the bill could come as early as next week.

"(I) am here today because I want to urge you to join us, instead of fighting us in this effort," Obama told an audience that included some of Wall Street's top executives. Goldman Sachs CEO Lloyd Blankfein and COO Gary Cohn were there, along with top managers from Credit Suisse, Bank of America, Barclays, Morgan Stanley and JP Morgan Chase.

Blankfein's company was charged last Friday by the Securities and Exchange Commission with civil fraud over the way it structured and marketed to investors a product linked to subprime mortgages. Blankfein and one of his traders, Fabrice Tourre, will testify Tuesday before a Senate panel examining the causes behind the financial crisis, a repeat of which Obama said reform would prevent.

"One of the most significant contributors to this recession was a financial crisis as dire as any we've known in generations," Obama said in the historic Great Hall of New York's Cooper Union. "And that crisis was born of a failure of responsibility — from Wall Street to Washington — that brought down many of the world's largest financial firms and nearly dragged our economy into a second Great Depression."

It was an echo of his first Cooper Union speech two years ago, when then-candidate Obama argued that the dismantling of financial regulations in the 1980s and '90s “encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy.”

Six months later, the financial markets all but shut down after the collapse of Bear Stearns sparked the biggest financial panic in a century.

"I take no satisfaction in noting that my comments have largely been borne out by the events that followed,” Obama said Thursday. “But I repeat what I said then because it is essential that we learn the lessons of this crisis, so we don't doom ourselves to repeat it."

Despite the ongoing partisan debate over financial reform in Washington, the audience responded warmly to the president's speech.

“I thought it was a great speech,” said James Chanos, founder of Kynikos Associates, a hedge fund.

“There was a little bit of admonishment, but there was also the olive branch and a lot bit of common sense: ‘Let's get this done.’ So far I think Wall Street is understanding that reform is going to happen no matter what it does.

“What the American people want and what the markets want is a fair and level playing field where the rules are clearly elucidated and the referees are competent and we know the game is not rigged,” said Chanos.

“I think it was a terrific speech,” said Peter J. Solomon, an investment banker and former vice chairman of Lehman Bros., which collapsed in the 2008 crisis. “He’s much more assertive since he won health care. It was precise, it was concise and it was accurate. I think he’s going to get the vote. I think he’s going to get all of it. And I don’t see anything in there that’s bad for Wall Street.”

Still, many on Wall Street are more than a little concerned about just what that “it” will be. The House has already passed a bill that includes many of the elements proposed in a bill backed by Senate Democrats.

“We’ve got one in the House, and the Senate bill is literally its changing hour by hour,” said Richard Beattie, chairman of the law firm Simpson Thacher & Bartlett. “I like the general sense of it the tone of it. We need regulatory reform. A lot of my clients are opposed. Some are in favor. It’s a mixed bag.”

Those clients won’t know the true impact on their business until final language has been written. And much like health care reform, the debate over the multipronged effort to regulate the financial services industry often turns on some very specific details.

One part of the bill, for example, would regulate trading in derivatives, the complex financial products that lay at the heart of the September 2008 financial meltdown.

“How do you even agree on the definition of a derivative?” said former New York Gov. Mario Cuomo. “Ask three people and you’ll get three different answers.”

Some of the pushback against the reform bills has been based on concerns that tighter restrictions on banks may lead to tighter credit, a problem that many small businesses now face as bankers have become much choosier about who they lend to.

But if the rules help prevent another meltdown, they’ll be well worth any additional burdens, according to Arti Bhatt, a business development manager at Brooklyn-based IceStone, a building products maker.

“We’re all in favor of transparency and accountability,” she said. “So we’re big supporters of financial reform.”

Some Wall Street bankers fear the new regulations could cut into their profits. But Rep. Maloney said the new regulations would put the financial system and the economy on a sounder footing.

“The goal is to prevent what happened from happening again. We had regulations after the Great Depression that gave us 50 years of prosperity. This will help give us another 50 years,” Maloney said.